Balance of Payments

4/9/15

Balance of payments: measure of money inflows and outflows between the united stated and the rest of the world (ROW)
-inflows are referred to as credits
-outflows are referred to as debits
-balance of payments is divided into 3 accounts
1. Current account
2. Capital/financial account
3. Official reserves

Double entry bookkeeping: every transaction in the balance of payments is recorded twice in accordance with standard accounting practice
Ex: us manufacturer, john Deere, exports $50 million worth if farm equipment to Ireland
-$50 million worth of farm equipment or physical assets
-a debit of $50 million to the capital/financial account (+$50 million worth of euros or financial assets)


Balance of trade or net exports
-exports of goods/services-import of goods/services
-exports create a credit to the balance of payment
-imports create a debut to the balance of payments

Net foreign income
-income earned by us owned foreign assets - income paid to foreign held us assets
-ex. Interest payments on is owned Brazilian bonds - interest payments on German owner us treasury bonds

Net transfers (unilateral)
-foreign aid ->a debut to the current account
-ex: mexican migrant workers send money to family in Mexico

Capital/financial account
-the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the United States is a credit to the capital account
-purchases of stocks and bonds by foreigners
-purchase of foreign financial assets represents a debit to the capital account
-ex. Warren buffet buys stock in petrochina

-purchase of domestic financial assets by foreigners represents a credit to the capital account
-united arab emirates sovereign wealth find purchases a large stake in the Nasdaq

Relationship between current and capital account
-the current account and the capital account should zero each other out
-if the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus)

4/13/15
Official reserves:
-the foreign currency holdings of the us federal reserve system
-when there is a balance of payments surplus the fed accumulated foreign currency and debits the balance of payments
-when there is a balance of payments deficit the fed depletes it's reserves of foreign currency and credits the balance of payments
-the official reserves zero out the balance of payments

Active v. Passive official reserves
-the United States is passive in it's use of official reserves. It does not seek to manipulate the dollar exchange rate
-the peoples republic of china is active in it's use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the United States